Question

**Aaron wants to buy a Tesla Model S in three years. The
current price of a Tesla Model S is $65,000. Aaron's investment
account earns 6.5% interest annually, and it has a current balance
of $50,000. Assume the annual inflation rate will be 2%. According
to this information, which of these is closest to the price that
Aaron will pay for his Tesla in three years (in
Year-3-dollars)?**

1 $73,988

2 $68,979

3 $78,517

4 $61,251

**Consider the following cash flow streams. If the
discount rate is positive, which of them has the highest present
value (value at t=0)?**

Year Stream A Stream B Stream C

1 100 100 0

2 0 0 100

3 0 100 0

4 100 0 100

5 0 100 100

6 100 0 0

1.The three streams have the same present value.

2.There is not enough information to answer the question.

3. Stream C

4. Stream B

5. Stream A

Answer #1

Part a) Answer: 2) $68,979

If we want to compute future price of the product, then the present
value of the product is adjusted with inflation rate.

Tesla price after 3years = current price*(1+inflation rate)^3years = $65,000*(1+0.02)^3 = $65,000*(1.02^3) = $65,000*1.061208 = $68,978.52

Part b) Answer: 4) Stream B

Assume discount rate is 10%

Year |
PVF @
10% |
Stream
A |
DCF A (Stream
A*PVF@10%) |
Stream
B |
DCF B (Stream
B*PVF@10%) |
Stream
C |
DCF C (Stream C
*PVF@10%) |

1 | 1/1.1 = 0.9091 | 100 | 90.91 | 100 | 90.91 | 0 | 0 |

2 | 0.9091/1.1 = 0.8265 | 0 | 0 | 0 | 0 | 100 | 82.65 |

3 | 0.8265/1.1 = 0.7514 | 0 | 0 | 100 | 75.14 | 0 | 0 |

4 | 0.7514/1.1 = 0.6831 | 100 | 68.31 | 0 | 0 | 100 | 68.31 |

5 | 0.6831/1.1 = 0.621 | 0 | 0 | 100 | 62.1 | 100 | 62.1 |

6 | 0.621/1.1 = 0.5645 | 100 | 56.45 | 0 | 0 | 0 | 0 |

215.67 |
228.15 |
213.06 |

Since DCF B is highest

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